Question

On November 1, 2014, Hollingsworth Company has a note payable with a book value of $100,000. At the time of issue, the market rate of interest was 10%. Hollingsworth chooses to record this note at fair value. At December 31, 2014, interest rates have decreased to 8%. As a result, the fair value of the note is $106,624.

A. Provide the journal entry for the date of fair value measurement on December 31, 2014.On March 31, 2015, the fair value of the bonds is $98,500.
B. Provide the journal entry for the March 31, 2015, quarterly financial statements.

Answer 1

On December 31, 2014, the journal entry to record the fair value measurement is a debit to Note Payable and a credit to Gain on Fair Value Measurement. On March 31, 2015, the journal entry to record the fair value measurement of the bonds is a debit to Loss on Fair Value Measurement and a credit to Note Payable.

Step-by-step explanation:

On December 31, 2014, when the fair value of the note payable is $106,624, the journal entry to record this fair value measurement would be:

1. Debit: Note Payable ($6,624)
2. Credit: Gain on Fair Value Measurement ($6,624)

On March 31, 2015, when the fair value of the bonds is $98,500, the journal entry to record this fair value measurement for the March 31, 2015, quarterly financial statements would be:

1. Debit: Loss on Fair Value Measurement ($8,124)
2. Credit: Note Payable ($8,124)